My Company

By Paula Aven Gladych

Long-term savings in a 401(k), combined with Social Security, will be enough to replace at least 60 percent of most workers’ pre-retirement pay in retirement, according to a report by the Employee Benefit Research Institute.

Assuming that current Social Security benefits are not reduced, EBRI found that between 83 and 86 percent of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan should have enough to replace at least 60 percent of the wages they were making at age 64, on an inflation-adjusted basis.

If the threshold for a financially successful retirement is set at 70 percent replacement of age 64 income, 73 to 76 percent of these workers will meet it and at 80 percent, 67 percent of the lowest income workers will still meet the threshold, EBRI found.

Automatic enrollment 401(k) plans are a game changer. EBRI’s research found that if people are automatically enrolled in a plan, with a 1 percent annual automatic escalation of their deferral, the probability of success increases substantially. In this scenario, 88 to 94 percent of workers would achieve the 60 percent threshold with just their 401(k) and Social Security income. At the 70 percent threshold, 81 to 90 percent would reach it and at the 80 percent threshold, 73 to 85 percent of workers would achieve it.

Jack VanDerhei, EBRI’s research director and author of the analysis, pointed out that without Social Security benefits, these estimations would be pointless. The program is an integral piece of retirement income security, particularly for lower income workers.

EBRI first calculated the accumulated retirement-adequacy deficits by age, family status, and gender for baby boomers and Generation X in 2010. At that time, the aggregate deficit number, assuming current Social Security retirement benefits, was estimated to be $4.6 trillion, with an individual average of approximately $48,000.

If Social Security benefits were to be eliminated, the aggregate deficit would jump to $8.5 trillion and the average would increase to approximately $89,000.

The study also noted that the presence of a defined benefit accrual at age 65 increases the probability of not running short of money in retirement by 11.6 percentage points, and is particularly valuable for the lowest-income quartile but also has a strong impact on the middle class.